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EDITORIAL: Rate cut is a sugar rush

29 March 2018 - 06:16

Reserve Bank governor Lesetja Kganyago at the central bank's head offices in Pretoria, March 28 2018. Picture: BUSINESS DAY

It is seldom you can say that a meeting of the monetary policy committee was a ding-dong affair, but apparently this one was. The committee decided by four votes to three to reduce interest rates by 25 basis points, providing another boost to the economy in this current phase of Ramaphoria.

But in the same way euphoria often flatters to deceive, this sugar rush could turn out to be a oneoff. Reserve Bank governor Lesetja Kganyago conceded it was a "very heated debate".

The nature of the debate is easy to comprehend. Different forces and expectations are pulling inflation in different directions and it is more difficult than usual to see how this battle will go.

On the one hand, inflation was at a three-year low of 4% year on year in February. The lower inflation was caused by weaker food prices, which have eased as the recent drought lifted.

The key items are turning the positive political changes into more concrete plans. There is some evidence that this time the government does mean business when it comes to parastatals particularly, including the most crucial of them all, Eskom.

The other obvious influences were the stronger rand after the quickfire political changes and the decision by ratings agency Moody’s to not only refrain from downgrading SA but actually improve its outlook.

All that bodes well for inflation, but as always there is a counter argument, which in this case has powerful merits. The first is the VAT hike is likely to increase headline inflation by about 0.6 percentage point. Electricity tariffs are probably going to rise. And the rand’s rally could well run out of steam. In fact, it could go into reverse as the US increases interest rates later in 2018.

As it turns out, the rand actually dropped a percentage point, so inflation is probably going to increase over the year.

Capital Economics economist John Ashbourne confidently predicts that the interest-rate cut does not signal the start of a new easing cycle. "We think that policy makers were attempting to seize the opportunity for a quick cut before inflation picks up later this year."

The monetary policy committee was itself cautious about the cut, saying that in the light of the improved inflation outlook and risk moderation "there was some room to provide further accommodation without undermining the inflation trajectory or the downward trend in inflation expectations". Hardly a suggestion of a new trend.

Yet all of the inflationary tendencies could end up being less dramatic than it might seem. The effects of electricity tariffs, in particular, are not expected to be dramatic.

Economist Raymond Parsons, professor at the North West University School of Business and Governance, agrees there is no guarantee that rates will continue to decline in 2018 but does not rule out the possibility that they could. Much depends on the usual suspects: the rand, the strength of domestic demand and the expected future rate of inflation.

But, Parsons points out, the outlook for growth in 2018 is now better, with a growth rate of about 1.8% likely, compared with about 1.3% in 2017. "The previous hesitant economic recovery is now steadily broadening across the economy. What remains important now is that the structural reforms and policy certainty needed to translate the present economic recovery into much higher sustainable growth rates over the longer term begin to take place," he says.

In other words, SA needs to turn the sugar rush into real, sustainable energy.

The key items are turning the positive political changes into more concrete plans. There is some evidence that this time the government does mean business when it comes to parastatals particularly, including the most crucial of them all, Eskom. The will to succeed is definitely improved and the new board appointments and personnel changes seem positive.

In the end, the rate decrease might not indicate a new downward trajectory. The real significance is that it does suggest the previous upward trend has been halted.